The Repsol-YPF Tower in Argentina. Image by Wikimedia Commons.
BUENOS AIRES – The expropriation of nearly all of the Spanish company Repsol’s stake in Argentina’s energy producer YPF, announced in a vehement speech by President Cristina Fernández de Kirchner, has raised legal alarms worldwide. In fact, the move will not resolve the country’s energy problems in the absence of enormous inflows of investment to the sector.
Repsol acquired complete control of YPF in 1999; in February 2008, it transferred part of its shares to the Petersen Group, which today holds 25%. Repsol currently holds 57%, with the rest owned by stock-market investors. The Argentine government intends to expropriate 51%, leaving Repsol with a 6% stake.
In the 2008 sale of shares, the two majority stockholders agreed to distribute at least 90% of future profits in cash. That decision was intended to allow the Petersen Group to service the debts to banks, and to Repsol itself, that it incurred with its share purchase, for which it made no initial payment.
Tullow oil camp, Uganda. Image by Conservation Concepts on Flickr (CC BY 2.0).
In recent years, major reserves of oil have been discovered at various locations across Africa. If this ‘black gold’ represents an opportunity for economic growth, the fear that the windfall may not benefit the local populations – and maybe even become a curse – is shared by Sub-Saharan African citizens and experts alike.
“It is common practice for oil and gas producing countries to negotiate local content agreements with interested IOCs [International Oil Companies] in an attempt to secure for the country a higher share of the value from oil and gas projects. This trend has surfaced as a result of the realization of the poor economic performance of many resource rich countries despite their vast wealth.”
The dependency of Western economies on oil imports has shaped foreign policy considerations in the Middle East for decades and has, in turn, deeply influenced the balance of power across the region. With an estimated three quarters of total conventional oil reserves still to be found in the Middle East, one might conclude that policy alternatives will remain limited when it comes to preserving energy security. Meanwhile, the toppling of regimes in the Maghreb has yet again proven to policy makers that relying on this particular region for oil might not be the safest bet. However, Israel might be about to revolutionize the global energy sector.
In late 2010, the World Energy Council estimated that Israel had reserves of up to 4 billion barrels of oil shale. More recently, the ‘Israel Energy Initiative’ estimated that Israel is actually sitting on reserves of 250 billion barrels (to put this number in perspective, Saudi Arabia’s reserves mount up to 260 billion barrels of conventional oil). If proven, this would make Israel home to the third largest oil shale deposits after the United States and China. So how come this story is not making the headlines?
Will Venezuela be next to stumble into a debt crisis – ironically, a country well endowed with the world’s most sought after resource? In its most recent issue, The Economistraises this question, as rumors swirl that the Bolivarian Republic might not be able to repay its international obligations between 2012 and 2015. The possible default of one of the world’s foremost oil producers should give the international community pause although any crisis is unlikely to materialize immediately. However, as soon as oil prices fall considerably below $100 per barrel, the Venezuelan economy will be deprived of its main foreign income, and a debt crisis might not be far behind – possibly threatening President Hugo Chavez’ long rule.
L’état, c’est Hugo
Despite high oil prices, Venezuelan GDP has been contracting for the last three years and inflation has been over 20 percent since 2007. Exports have been falling steadily and because power and water infrastructure falls short of much needed investment, Venezuelans are often forced to take cold showers. Even productivity in the state-owned oil company PDVSA has decreased by a third since Chavez took power in 1999. Chavez is infamous for his erratic behavior and his dislike of the private sector. During his 12-year rule, he has nationalized hundreds of domestic and foreign companies, closely regulated the economy and eliminated market mechanisms. In this way Chavez has paved the way for widespread corruption and inefficiency. Moreover, he has been governing by decree since December 2010, which grants him almost unlimited power to push through policies without parliamentary control. In Venezuela l’état, c’est Hugo. In this atmosphere of impunity many Venezuelan entrepreneurs have given up their businesses, and foreigners are increasingly reluctant to invest. In a recent country risk assessment Venezuela ranked 93 out of 100 – with civil-war plagued neighbor Colombia ranking a much higher 51.
The Achilles heel
As the government has successfully dismantled the private economy, Venezuela’s dependence on revenues from oil exports has increased, and imports have risen as many goods are no longer produced in Venezuela. Oil production makes up about a third of GDP and generates the lion’s share of the government’s revenue. Fluctuating oil prices are thus the Achilles heel of the whole economy. As soon as oil prices fall, Chavez might find it difficult to keep up public spending and to repay international obligations (net public debt was 29 percent of GDP in 2010). This might not only lead to a debt crisis and hamper economic growth but also to a decline in Chavez’ popularity. With plans to run again for president in 2012, he is in dire need of oil money to subsidize basic goods such as food. Otherwise the poorest will be hit even harder by rising food and living costs, with their incomes eaten up by staggering inflation – perhaps just like Chavez’ personal political future.
Some of Russia’s pipelines have names that reflect more than just technical realities – such as the Druzhba (Friendship) pipeline system that brings oil to Central Europe. Yet, others are of a more prosaic kind, including the recently opened Eastern Siberia-Pacific Ocean Pipeline (ESPO). ESPO will bring the black gold from Eastern Russia to China and Russia’s Pacific Coast. Whether this new pipeline is the beginning of a new Russian-Chinese energy-friendship remains to be seen.
China’s growing appetite for gas and oil will be hard to saturate in the next decades. According to projections of the International Energy Agency, China’s demand for primary energy will nearly double from 1,765 million tons of oil equivalent (Mtoe) in 2007 to 2,539 Mtoe in 2020 and 3,451 Mtoe in 2035. The country will account for 30 percent of the increase in global primary energy demand for that period. Oil demand is expected to more than double while the demand for natural gas will more than triple.
Before that backdrop one would expect Russia, home to 5 percent of the world’s proven oil reserves and 24 percent of all proven gas resources, to be eager to enter this growing market; even more so, since the focus of Russia’s oil and gas production is moving eastwards. There are untapped hydrocarbon resources in Eastern Siberia and Russia’s Far East that are expected to cover falling production elsewhere. Furthermore, hooking up with China holds major potential for developing an economically backward region and would add another trump to Russia’s hand when bargaining with its European energy customers.
But that’s not how Russia seems to view the situation.
